Tuesday, June 16, 2015

China Rallies Around Yuan as IMF Mulls Reserve-Currency Inclusion

The release of a report on renminbi internationalization comes as members of the IMF are on a visit to China

By

Lingling Wei

Updated June 15, 2015 1:33 p.m. ET

BEIJING—China’s central bank is preparing to take new steps to lift the global profile of the yuan as the International Monetary Fund reviews whether to grant it elite status as a reserve currency. In a report issued late last week, the People’s Bank of China detailed moves it will take to encourage the IMF to take that step, putting the currency on a par with the dollar, euro, yen and pound sterling. Reserve status could potentially encourage other central banks to increase their holdings of the currency.

To win approval from the IMF, Beijing must make the case that the yuan can easily be used in international markets. Potential steps listed in the report include opening the door wider for foreign central banks and other institutional investors to invest in China’s bond market.

The report on internationalization of the yuan—also known as the renminbi, or people’s currency—comes as a team from the IMF visits China this week to help assess whether to declare the yuan an official reserve currency. On Monday and Tuesday, the IMF team was scheduled to hold technical discussions in Shanghai with officials at the Chinese central bank and China Foreign Exchange Trading System, which oversees currency trading in China, according to people with knowledge of the matter.

Beijing’s push comes as it seeks to wield more influence over the global economy. Chinese officials hope that over time, reserve-currency status would increase demand for the yuan among central banks as Beijing challenges the U.S.’s political and economic dominance around the world.

“The SDR entry would give China a greater say in the international monetary system,” a Chinese central-bank official said on Monday. “No question. We’re making real efforts to make it happen.” Efforts to win reserve-country status could also help accelerate the liberalization of China’s heavily regulated financial markets. PBOC Gov. Zhou Xiaochuan has said China will free up interest rates and the flow of capital across the border by the end of the year.

Gaining reserve-currency status for the yuan isn’t likely to affect how countries manage their foreign-exchange holdings right away, but “it potentially paves the way towards renminbi internationalization by encouraging institutional investors to catch up in this underinvested currency,” said Helen Qiao, an analyst at Morgan Stanley. In its report, China’s central bank estimated that at the end of April, foreign central banks held approximately 666.7 billion yuan ($107.41 billion) in their foreign-exchange reserves. It was the first time the PBOC has disclosed such data.

The central bank didn’t detail how many yuan individual countries are holding, but the totals are rising. Over the past year, countries including the U.K. and Australia have begun adding the currency to their official reserves, though the yuan still represents only a sliver of the total.

According to IMF data, the world’s central banks had allocated more than $6 trillion of foreign-exchange reserves at the end of last year. More than 60% was in U.S. dollars, followed by 23% in euros, 4% in the yen and 3.9% in the pound sterling. China’s estimates rank the amount of yuan assets in global central-bank reserves right behind those of Canadian and Australian dollars.Senior IMF officials, including managing director Christine Lagarde, have indicated that the organization shares Beijing’s interest in giving the yuan reserve-currency status. The issue, officials have indicated, is when the currency will be added.

To be awarded reserve-currency status, the yuan must be “freely usable,” a term the agency has wide freedom to interpret. China’s efforts in recent years to foster greater international use of the yuan could help it to satisfy the IMF.Nearly 25% of China’s trade was conducted in yuan last year, official data show, up from 0.02% in 2009.

Beijing’s growing economic clout has added to tensions between China and the U.S. The White House suffered a diplomatic bruising earlier this year, when many U.S. allies rejected lobbying by the administration against a new Beijing -led infrastructure bank. They instead became founding members of the Asian Infrastructure Investment Bank, or AIIB, which has been seen as a potential rival to the U.S.-led World Bank.

“It’s critical that the U.S. avoid another AIIB-like moment where it opposes a new Chinese initiative that is widely embraced by others and leaves the U.S. defeated and isolated,” said Scott Kennedy, a China analyst at the Center for Strategic and International Studies, a Washington-based think tank. In recent months, China has accelerated the overhaul by putting in place a long-awaited deposit insurance system and moving closer to freeing up interest rates, a step seen as critical to further changes. In addition, it has given foreign investors greater access to Chinese securities and made it easier for Chinese to invest abroad. Beijing is putting the final touches on a trial program to give Chinese residents and companies expanded, direct access to stocks, bonds and real estate in foreign markets.

“China is not far from realizing its goal of capital-account liberalization,” the PBOC said in its report, referring to free cross-border flows of funds for financial transactions.

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